One of the great benefits of homeownership is the equity you earn--the amount of your house that you personally own. That equity gives you the ability to turn your property into capital. This is the basis for another of the common reasons people refinance, known as Cash Out Refinancing. With this option, you would refinance your mortgage (with the option of changing the loan’s term, taking advantage of a lower interest rate, etc.) then borrow additional cash against your equity. You end up taking a larger mortgage than you formerly owed, but take the difference in cash. Your equity is now liquid, or cash on hand.
Typically, that equity comes from two places: one is the principal you have already paid into the home, the other is any appreciation your home has enjoyed since you originated your mortgage. Both come to the same thing, which is your ownership stake in the property.
Depending on interest rates and the terms of your mortgage, Cash Out may be a more affordable way to get a new loan than taking out a home equity loan and leaving your mortgage untouched. Frequently, this would be part of a home improvement effort--you may want to do a major remodel, or else want to do updates to maximize resale value down the road--but you can theoretically spend that cash on whatever you want. It is your equity, and it is your money. But it does increase the total principal of your new mortgage, and will factor into the accumulation of interest over time.
Making the most of this form of refinancing requires particularly careful math. There are a lot of ways to take out a loan, or even to borrow against your home’s equity, including a traditional Home Equity Loan, as well as a Home Equity Line Of Credit (HELOC), both of which can be made separately from your mortgage, and neither of which generally requires closing fees. Determining which makes the most sense for you requires you to consider:
Even if you plan on using the money on a home improvement project, you’ll want to be diligent in your research to ensure that the added value you create in your home is worth the extra costs in your mortgage. As with any refinancing option, you will need to calculate your break even point, and carefully consider whether your financial goals align properly with the mortgage for which you qualify.